Long-Term MRO Rebound Tempered By Uncertainty

Maintenance, repair and overhaul (MRO) executives are feeling optimistic as the airline aftermarket rebounds, while keeping a cautious eye on market forces, such as rising fuel prices, that could undo the uptick.

“Cautious” is the key word because “it’s not time to break out the champagne bottles and get too euphoric about what the future picture is,” says Chris Spafford, an Oliver Wyman partner.

Besides routine maintenance, prominent bright spots in the current market include pent-up demand for non-critical MRO work that has been deferred and needs attention, and inventories that were greatly downsized during the global economic recession and call for replenishing. Airlines also are upgrading interiors, especially in premium cabins, as passenger traffic picks up. All of this could generate an 8% growth rate this year, predicts Spafford, who believes that after the maintenance bubble pops, the rate will slide to about 3% per year through 2014.

Aviation consultancy TeamSAI predicts the 2014 MRO market will be worth about $46.9 billion, up 10.8% from 2010. It forecasts a 3.8% compound annual growth rate through 2016, when it sees market value rise to $56.4 billion.

The forecast expansion is noteworthy, but the ups and downs of the past decade have basically placed the civil MRO market where it was in 2001, says Spafford. While the champagne celebration may be premature, the industry's tentative confidence rests on the assumption that the major industry restructuring is over.

Three factors support this idea:

• Aftermarket organizations are adding personnel. Oliver Wyman, in its annual MRO survey to be released April 12, finds that 23% of respondents plan to increase their staff, offsetting the 22% that plan to decrease head counts. This compares with 50% of survey respondents who reported decreases last year.

• Several leading MROs are sold out for many months in advance—some for the rest of the year. This is true for high-quality MROs around the world; 47% of respondents to the Oliver Wyman survey report capacity utilization rates of at least 80%.

• Aftermarket companies are investing. For example, Dean Baldwin Painting plans to double its company size by acquiring a hangar in Peru, Ind., and spending $10.5 million to convert it into an up-to-date, four-bay paint facility, which it aims to open in December.

AeroTurbine, owned by AerCap, has been spending money the past four years on hiring people, expanding aircraft and engine component spares capabilities, and adding offices in Singapore, the U.K. and Abu Dhabi, UAE. This investment in front-end business growth has led it to chase larger deals, such as the one recently signed with American Airlines. The carrier sells its excess inventory to AeroTurbine, which opened a warehouse in Tulsa, Okla., near American’s heavy maintenance base, and it monetizes that surplus for the airline. “The initial batch of parts includes 20,000 line items [parts for aircraft ranging from Boeing 737NGs to MD-80s]," according to Mike King, AeroTurbine’s president and CEO.

MRO companies, such as AAR Corp., are continuing to invest as well. AAR, which projects sales this year of about $1.8 billion, up from $600 million in 2003, has expanded through acquisitions and organic growth, such as component repair and engineering services. David Storch, chairman and CEO, says, “I would visualize making acquisitions that are complementary to the things that we currently do ... [to] widen or broaden our footprint and our capabilities.” When prodded, he admits to being open to completing “some deals” this year.

Broadening and widening is also what Chromalloy is looking for in its $35 million expenditure on turbine engine ceramic core and component casting facilities in Tampa, Fla. It also is developing a new technology center for turbine engine repairs, parts and coatings in Florida that it expects to open in the fourth quarter. The casting facility decreases parts processing time, which enables more throughput.

For more news from Aviation Week's MRO Americas conference, going on this week in Miami, go to AviationWeek.com.